Q3 2023 CrossFirst Bankshares Inc Earnings Call

[music].

Speaker 1: very happy

Yeah.

Speaker 2: Good morning and welcome to the Crosse First Bank Shares in Q3 2023 earnings conference call. All participants will be in listen only mode. Should you need assistance please signal conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions. license stop.

Good morning, and welcome to the Cross first Bancshares, Inc. Q3, 2023 earnings conference call all participants will be in listen only mode.

Need assistance, please signal conference specialist by pressing the star key followed by zero.

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Please note this event is being recorded.

Speaker 2: I would now like to turn the conference over to Mike Daly, Chief Accounting Officer and Head of...

I would now like to turn the conference, Mike Daly, Chief Accounting Officer, and head of Investor Relations. Please go ahead.

Speaker 3: Good morning and welcome to Crossroads Bankshare's third quarter 2023 earnings conference call. Before we begin, please be aware this call will include forward-looking statements, including statements about our business plans, expansion and growth opportunities, expense control initiatives, sources of liquidity, capital allocation strategies, and our future financial performance.

Good morning, and welcome to Cross first Bancshares third quarter 2023 earnings conference call before we begin please be aware. This call will include forward looking statements, including statements about our business plans expansion and growth opportunities expense control initiatives sources of liquidity capital allocation strategies.

And our future financial performance. These comments are based on our current expectations and assumptions and are subject to risks and uncertainties that could cause actual results to differ materially from these statements.

Speaker 3: These comments are based on our current expectations and assumptions and our subject to risks and uncertainties that could cause actual results to differ materially from these statements.

Speaker 3: Our forward-looking statements are as of the date of this call, and we do not assume any obligation to update or revise them, except as required by law. Statements made on this call should be considered together with the risk factors identified in today's earnings release and our other filings with the SEC.

Our forward looking statements are as of the date of this call and we do not assume any obligation to update or revise them, except as required by law statements made on this call should be considered together with the risk factors identified in today's earnings release, and our other filings with the SEC.

Speaker 3: We may also refer to adjusted or non-GAAP financial measures. A reconciliation of non-GAAP financial measures to GAAP financial measures can be found in our earnings release.

We may also refer to adjusted or non-GAAP financial measures a reconciliation of non-GAAP financial measures to GAAP financial measures can be found in our earnings release. These non-GAAP financial measures are not meant to be a substitute for or superior to financial measures prepared in accordance with GAAP.

Speaker 3: These non-GAAP financial measures are not meant to be a substitute for, or superior to, financial measures prepared in accordance with GAAP.

Speaker 3: Our presentation will include prepared remarks from Mike Maddox, President and CEO of Cross First Bank shares, Randy Rapp, President of Cross First Bank, and Ben Clough, CFO of Cross First Bank.

Our presentation will include prepared remarks from Mike Maddox, President and CEO of Cross first Bancshares, Randy Rapp President of Cross first bank and Ben Clouse CFO of cross first bancshares at the conclusion of our prepared remarks, our operator, Anthony will facilitate a Q&A session. At this time I would like to turn the call over to Mike who will begin on slide five.

Speaker 3: At the conclusion of our prepared remarks, our operator Anthony will facilitate a Q&A session. At this time, I would like to turn the call over to Mike, who will begin on slide five of the presentation available on our website and filed with our earnings release. Mike.

The presentation available on our website and filed with our earnings release Mike.

Speaker 4: Thank you and good morning everyone. I'm very proud of this quarter and the great job that our team is doing.

Thank you and good morning, everyone.

I'm very proud of this quarter and the great job that our team is doing well.

Speaker 4: We are seeing the benefits of the investments we have made over the last 24 months.

We are seeing the benefits of the investments we have made over the last 24 months.

Speaker 4: We continue to execute on our strategic plans this quarter with growth and operating revenue, core deposits, and earnings despite a difficult macro environment for banking.

We continued to execute on our strategic plans this quarter with growth in operating revenue core deposits and earnings despite a difficult macro environment for banking with.

Speaker 4: We delivered 7% growth in adjusted earnings this quarter with adjusted net income of 18.6 million or 37 cents per share.

We delivered 7% growth in adjusted earnings this quarter with adjusted net income of $18 6 million or <unk> 37 per share.

Speaker 4: We remain focused on improving profitability by scaling our franchise and our high growth dynamic markets and verticals, optimizing our expense base and driving efficiency, all while remaining diligent on credit quality.

We remain focused on improving profitability by scaling our franchise and our high growth dynamic markets and verticals optimizing our expense base and driving efficiency, all while remaining diligent on credit quality.

Speaker 4: Pressure on our margin has slowed due to some normalization of pricing for the pot.

Pressure on our margin has slowed due to some normalization of pricing for deposits.

Speaker 4: We also continue to benefit from our highly variable loan portfolio.

We also continue to benefit from our highly variable loan portfolio.

Speaker 4: Our focus as a company is on earnings and profitability growth and less so on balance sheet growth as we drive improved efficiency and operating levels.

Our focus as a company is on earnings and profitability growth and less so on balance sheet growth as we drive improved efficiency and operating leverage.

Speaker 4: Competition for deposits continues to be strong. Despite that, however, our funding composition continues to improve as core deposits increased while wholesale borrowings declined and our loaned deposit ratio improved this past quarter.

Competition for deposits continues to be strong.

Despite that however, our funding composition continues to improve as core deposits increased while wholesale borrowings declined and our loan to deposit ratio improved this past quarter.

Speaker 4: As expected, our loan portfolio grew modestly this quarter, and we continue to see nice balance in our loan mix.

As expected our loan portfolio grew modestly this quarter and we continued to see nice balance in our loan mix.

Speaker 4: Additionally, I'm pleased to share that our SBA lending platform continues to gain traction across our markets and is accelerating our non-interest income growth.

Additionally, I'm pleased to share that our SBA lending platform continues to gain traction across our markets and is accelerating our noninterest income growth.

Speaker 4: Credit quality continues to be a primary focus, especially in the face of the number, excuse me, of challenging external facts.

Credit quality continues to be a primary focus, especially in the face of that number excuse me of challenging external factors.

Speaker 4: Our overall credit quality remains at manageable levels that are well within acceptable noise.

Our overall credit quality remains at manageable levels that are well within acceptable norms.

Speaker 4: Randy will cover credit in more detail in a moment, but let me just say that I remain confident in our high quality credit standards, our well-diversified portfolio, and more importantly, our relationship-based client approach.

Randy will cover credit in more detail in a moment.

But let me just say that I remain confident in our high quality credit standards are well diversified portfolio and more importantly, our relationship based client approach.

Speaker 4: During this past quarter, we completed our two-sided acquisition, which complements our existing Arizona franchise and provides additional liquidity and lower cost deposits.

During this past quarter, we completed our Tucson acquisition, which complements our existing Arizona franchise and provides additional liquidity and lower cost deposits.

Speaker 4: We were excited to welcome our new shareholders, clients, and team members, and look forward to supporting the needs of the Tucson community.

We were excited to welcome our new shareholders clients and team members and look forward to supporting the needs of the Tucson community.

Speaker 4: We expect to have our Tucson clients fully onboarded to our systems by mid-November.

We expect to have our Tucson clients fully on boarded to our systems by mid November .

Speaker 4: Wicking ahead, we are in a unique position with the opportunity to increase profitability through multiple levels.

Looking ahead, we are in a unique position with the opportunity to increase profitability through multiple levers.

Speaker 4: Scaling our existing investments, optimizing expenses, and maintaining a focus on credit quality.

Scaling our existing investments optimizing expenses and maintaining a focus on credit quality.

Speaker 4: We have the opportunity to increase profitability by gaining density in our dynamic high growth metro markets and verticals.

We have the opportunity to increase profitability by gaining density in our dynamic high growth metro markets and verticals.

Speaker 4: In addition, we intend to continue to prudently manage expenses, including an ongoing focus on optimizing operations, leveraging key technology and infrastructure investments.

In addition, we intend to continue to prudently manage expenses, including an ongoing focus on optimizing operations leveraging key technology and infrastructure investments.

Speaker 4: Finally, maintaining solid credit quality is at the center of everything we do. Our team is focused on these priorities, which we believe position cross-first for the future while enhancing our franchise value.

Finally, maintaining solid credit quality is at the center of everything we do our team is focused on these priorities, which we believe position cross first for the future while enhancing our franchise value.

Speaker 4: And now I'd like to turn the call over to our President of Crossroads Bank Randy Rapp.

And now I'd like to turn the call over to our President of Cross first Bank Randy Rapp.

Speaker 4: Thanks, Mike, and good morning, everyone. In Q3, we continued to intentionally moderate the pace of loan growth. We remained highly focused on deposit generation and closely monitored our portfolio metrics.

Thanks, Mike and good morning, everyone. In Q3, we continue to intentionally moderate the pace of loan growth. We remained highly focused on deposit generation and closely monitored our portfolio metrics in Q3, we reported total loan growth of $149 million, resulting in a gross.

Speaker 5: In Q3, we reported total loan growth of 149 million, resulting in a growth rate of 2.6% for the quarter, or 10% on an annualized basis.

Rate of two 6% for the quarter or 10% on an annualized basis. The increase was primary primarily attributable to 106 million in loans from the Tucson acquisition, which are largely U S. D E and S. P. A guaranteed commercial real estate and C&I credits.

Speaker 5: The increase with primary, primarily attributable to 106 million in loans from the Tucson acquisition, which are largely USDA and SBA guaranteed commercial real estate and CNI credit.

Speaker 5: Legacy markets and lines grew approximately 43 million led by a slight increase in CRE exposure primarily due to fundings on existing relationships

Legacy markets and lines grew approximately 43 million led by a slight increase in CRE exposure, primarily due to fundings on existing relationships.

Speaker 5: We continue to focus on increasing loan yields, and the average loan yield on new production in the quarter was a strong 8.54%.

We continue to focus on increasing loan yields and the average loan yield on new production in the quarter was a strong 8.54%.

Speaker 5: Average CNI line utilization for the quarter was 47%, which is slightly above the prior quarter. And portfolio churn decreased slightly and is now below the historical average level. We expect portfolio churn to decrease slightly over the next several quarters.

Average C&I line utilization for the quarter was 47%, which is slightly above the prior quarter and portfolio churn decreased slightly and is now below the historical average level, we expect portfolio churn to decrease slightly over the next several quarters.

Speaker 5: Our loan portfolio continues to remain balanced with 43% in commercial real estate and 44% in CNI and owner-occupied real estate.

Our loan portfolio continues to remain balanced with 43% in commercial real estate and 44% in C&I and owner occupied real estate.

Speaker 5: Energy exposure is now 214 million or 4% of the total portfolio.

Energy exposure is now 214 million or 4% of the total portfolio.

Speaker 5: On slide six, you can see there remains good diversity within each of these portfolios with the highest CRE property type industrial, accounting for 19% of total CRE exposure, and the largest industry segment in C&I being manufacturing at 10% of C&I exposure.

On slide six you can see there remains good diversity within each of these portfolios with the highest CRE property type industrial accounting for 19% of total CRE exposure and the largest industry segment in C&I being manufacturing at 10% of C&I exposure.

Speaker 5: Total office exposure is now 294 million down slightly from 312 million at the end of Q2 and is 5% of total loans. The average office loan size remains 7 million and the largest is 25 million.

Total office exposure is now 294 million down slightly from 312 million at the end of Q2 and is 5% of total loans. The average office loan size remains 7 million and the largest is $25 million.

Speaker 5: The average loan to value is 61%, and the majority of the portfolio is suburban class A and class B off.

The average loan to value is 61% and the majority of the portfolio is suburban class a and class B office.

Speaker 5: As we have previously stated, we will follow our strongest sponsors to other markets, but the majority of this exposure is in our footprint centered in North Texas, Kansas City, and Colorado.

As we have previously stated we will follow our strongest sponsors to other markets, but the majority of this exposure is in our footprint centered in North, Texas, Kansas City and Colorado.

Speaker 5: Moving to credit highlights on slide seven, for Q3, we reported an increase in non-performing assets to 36.1 million, resulting in a non-performing asset to total asset ratio of 50 basis points.

Moving to credit highlights on slide seven for Q3, we reported an increase in nonperforming assets to $36 1 million, resulting in a nonperforming asset to total asset ratio of 50 basis points the.

Speaker 5: The increase was primarily due to two CNI credits and one CRE credit moving to non-performing.

The increase was primarily due to two C&I credits and one CRE credit moving to nonperforming.

Speaker 5: I'm pleased to report that one of the C&I credits with a $13.6 million balance that was over 90 days pass due at quarter end has raised fresh equity and plans to bring the credit current this week.

I'm pleased to report that one of the C&I credits with a 13.6 million dollar balance that was over 90 days past due at quarter end has raised fresh equity and plans to bring the credit current this week. This action will lower our N P as back to $22 5 million or 31 basis points of total assets.

Speaker 5: This action will lower our NPAs back to 22.5 million or 31 basis points of total assets.

Speaker 5: The remaining non-performing loans are primarily CNI with one fully secured commercial real estate transact.

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The remaining nonperforming loans, primarily C&I with one fully secured commercial real estate transaction.

Speaker 5: This remaining NPA ratio of 31 basis points is in line with the same period in 2022, and our ORE balance remains at zero.

This remaining N P. A ratio of 31 basis points is in line with the same period in 2022, and our Owari balance remains at zero.

Speaker 5: Classified assets to capital plus combined reserves in the Q3 at 14%, which is up from 9.6% the end of Q2, but remains at a low level.

Classified assets to capital plus combined reserves ended Q3 at 14%, which is up from nine 6%. The end of Q2, but remains at a low level. The increase in classified assets was due to downgrades of several CNI and CRE credits $21 million of the IND.

Speaker 5: The increase in classified assets was due to downgrades of several C&I and CRE credits.

Speaker 5: 21 million of the increase is well secured by current real estate valuations and 5 million has USDA or SBA guarantee.

Kris is well secured by current real estate valuations and $5 million has U S. D. A R. S. P a guarantees.

Speaker 5: We do not expect any material loss from these loans, and we are proactively managing each relationship. In addition, $5 million of the increase in classifieds was due to acquired loans, which were marked to market in the quarter.

We do not expect any material loss from these loans and we are proactively managing each relationship in.

In addition, 5 million of the increase in classifieds was due to acquired loans, which were mark to market in the quarter.

Speaker 5: For the quarter, we reported net charge offs of 1.3 million, resulting in a charge-off rate of nine basis points on an annualized basis, and five basis points on a trailing 12-month basis.

For the quarter, we reported net charge offs of 1.3 million, resulting in a charge off rate of nine basis points on an annualized basis and five basis points on a trailing 12 month basis.

Speaker 5: We reported an allowance for credit loss to total loan ratio of 1.2% which is up from 1.17 at the end of Q2. The combined allowance for credit loss and reserve for unfunded commitments totaled 1.31.

Quarter end, we reported an allowance for credit loss to total loan ratio of 1.2%, which is up from 1.17 at the end of Q2.

The combined allowance for credit loss and reserve for unfunded commitments totaled 1.31.

Speaker 5: For the quarter, we reported provision expense of 3.3 million resulting in a provision to charge off rate of 254%.

For the quarter, we reported provision expense of 3.3 million, resulting in a provision to charge off rate of 254% pre.

Speaker 5: Provision was higher than Q2 due to day one Cecil reserves for the acquired Tucson loans and changes in credit metrics during the quarter.

Provision was higher than Q2 due to day, one Cecil reserves for the acquired Tucson loans and changes in credit metrics during the quarter.

Speaker 5: With a total ACL of 72 million, our current ACL to non-performing loan ratio is nearly 200%. We remain highly focused on maintaining good credit metrics moving forward.

With a total ACL of 72 million, our current ACL to nonperforming loan ratio is nearly 200%.

We remain highly focused on maintaining good credit metrics moving forward.

Speaker 5: Turning to slide 8, deposit increased 3.8% to 6.3 billion, up 232 million from the previous quarter.

Turning to slide eight deposits increased three 8% to $6 3 billion up $232 million from the previous quarter.

Speaker 5: non-interest bearing deposits increased during the quarter to one billion and now represent sixteen percent but total deposits up from fifteen percent at the end of the second quarter

Noninterest bearing deposits increased during the quarter to 1 billion and now represent 16% of total deposits up from 15% at the end of the second quarter.

Speaker 5: Ben will cover additional deposit portfolio statistics in his remarks.

Ben will cover additional deposit portfolio statistics in his remarks.

Speaker 5: We continue to focus heavily on deposit generation, expanding fee income with Treasury management and credit card products.

We continue to focus heavily on deposit generation expanding fee income with Treasury management and credit card products improved.

Speaker 5: improving loan yields in the portfolio with new originations and as existing facilities mature and monitoring the portfolio for performance issues. We remain confident in our proven sponsors and underwriting standards, which include significant equity contributions, but we could continue to see some negative grade movement in the short term.

Improving loan yields and the portfolio with new originations and as existing facilities mature and monitoring the portfolio for performance issues. We remain confident in our proven sponsors and underwriting standards, which include significant equity contributions, but we could continue to see some negative grade movement in the short.

Speaker 5: We expect our loan growth rate to continue to be at a moderate level in the last quarter of 2023, but we continue to actively call on clients to generate a healthy pipeline of new transactions heading into 2024. I will now turn the call over to Ben to cover the financial results in more detail. Ben, thanks Randy.

Term, we expect our loan growth rate can you continue to be at a moderate level in the last quarter of 2023, but we continue to actively call on clients to generate a healthy pipeline of new transactions heading into 'twenty 'twenty four I will now turn the call over to Ben to cover the financial results in more detail Ben.

Thanks, Randy and good morning, everyone.

Speaker 5: Gap net income this quarter was $16.9 million, or $0.34 per share.

GAAP net income this quarter was $16 9 million or 34 cents per share.

Speaker 5: The third quarter included acquisition-related charges of $1.3 million and, as Randy said, a day one CECL provision of $0.9 million, resulting in adjusted net income of $18.6 million or $0.37 per share.

The third quarter included acquisition related charges of $1 3 million and as Randy said day, one seasonal provision a point 9 million, resulting in adjusted net income of $18 6 million or 37 cents per share.

Speaker 3: both GAAP and Adjusted Net Income improved from the prior quarter, with slowing margin pressure yielding increased net interest income.

Both GAAP and adjusted net income improved from the prior quarter with slowing margin pressure, yielding increased net interest income.

Speaker 5: an increase in non-interest income and lower non-interest expenses.

An increase in noninterest income and lower noninterest expenses.

Speaker 3: These gains were partially offset by a higher provision.

These gains were partially offset by a higher provision.

Speaker 3: Quarterly adjusted return on average assets was 1.04 percent and adjusted return on average equity was 11.3 percent.

Quarterly adjusted return on average assets was 1.04% and adjusted return on average equity was 11, 3%.

Speaker 3: We saw modest balance sheet growth primarily from the acquisition and continued our progress toward driving higher profitability through expense management in the quarter.

We saw modest balance sheet growth, primarily from the acquisition and continued our progress toward driving higher profitability through expense management in the quarter.

Speaker 3: Net interest income on a fully tax-equivalent basis expanded slightly by $0.5 million from the second quarter due to the benefit of higher average earning assets, higher loan yields, and one additional day, which were partially offset by higher costs to fund.

Net interest income on a fully tax equivalent basis expanded slightly by <unk> 5 million from the second quarter due to the benefit of higher average, earning assets higher loan yields and one additional day, which were partially offset by higher cost of funds.

Speaker 3: Average earning assets increased $183 million compared to the prior quarter with most of the net increase from the Tucson acquisition.

Average, earning assets increased $183 million compared to the prior quarter with most of the net increase from the Tucson acquisition.

Speaker 3: The yield on loans increased nine basis points due to repricing, as well as higher yields on new loans, and was negatively impacted seven basis points due to the net impact of non-accrual loans, as we are proactively addressing any signs of weakness in the portfolio.

The yield on loans increased nine basis points due to repricing as well as higher yields on new loans and was negatively impacted seven basis points due to the net impact of nonaccrual loans as we are proactively addressing any signs of weakness in the portfolio.

Speaker 3: Turning to page nine, our total cost of deposits was 3.59% for the quarter, against loan yields of 6.96%.

Turning to page nine our total cost of deposits was $3 five 9% for the quarter.

Against loan yields of $6 96 per cent.

Speaker 3: Our total non-maturity deposit beta against the entire rate cycle through the third quarter was 57, in line with our expectations, and we have slowed the growth in our cost of funds.

Our total non maturity deposit beta against the entire rate cycle through the third quarter was 57 in line with our expectations and we have slowed the growth in our cost of funds.

Speaker 3: Our deposit base remained consistent with the prior quarter in terms of diversification and composition.

Our deposit base remained consistent with the prior quarter in terms of diversification and composition. We were very pleased to see that deposit growth beyond the acquisition impact as well as growth in noninterest bearing deposits, which allowed us to decrease wholesale funding and F. H L V bar.

Speaker 3: We were very pleased to see that deposit growth beyond the acquisition impact, as well as growth in non-interest-bearing deposits.

Speaker 3: which allowed us to decrease wholesale funding and FHLB borrowing during the quarter.

Wings during the quarter.

Speaker 3: are effective, uninsured deposits percentage, and our deposit concentration across the top 25 clients remained consistent in this quarter.

Our effective uninsured deposits percentage and our deposit concentration across the top 25 clients remained consistent this quarter.

Speaker 3: Fully tax-equivalent net interest margin narrowed 8 basis points compared to the prior quarter to 3.19%.

Fully tax equivalent net interest margin narrowed eight basis points compared to the prior quarter to $3 one 9%.

Speaker 3: Our core NIM, adjusting out noise from accrual impacts, has remained stable in a range of 321 to 323 since May.

Our core NIM adjusting out noise from accrual impacts has remained stable in a range of $3 21 to 323 since may.

Speaker 3: Our balance sheet is only slightly sensitive through a potential additional 25 basis point rate move yet this year. And we expect margin to be in a range of 320 to 325 in Q4.

Our balance sheet is only slightly sensitive through a potential additional 25 basis point rate move yet this year and we.

Very healthy.

Operator: Good morning and welcome to the Crossfirst Bank Shares in Q3 2023 Earnings Conference Call. All participants will be in listen only mode. Should you need assistance please signal conference specialist by pressing the star key followed by zero. After today's presentation there will be an opportunity to ask questions to ask a question for a star then wanting your touch tone phone. To withdraw from the question queue please press star then two. We ask that you please lemme yourself to one question and one follow up. Please note this event is being recorded.

<unk> margin to be in a range of 320 to $3 25 in Q4.

Speaker 3: With continued lower anticipated loan growth, we don't expect as great of a need to add higher cost deposits going forward.

With continued lower anticipated loan growth, we don't expect as great of a need to add higher cost deposits going forward.

Speaker 3: While we acknowledge the competition for deposits will persist, we believe we are near the peak of deposit pricing, allowing us to continue to defend our NIM as we move forward from here.

While we acknowledge the competition for deposits will persist. We believe we are near the peak of deposit pricing, allowing us to continue to defend our NIM as we move forward from here.

Speaker 3: Non-interest income was $6 million for the quarter, increasing 3% from the second quarter.

Noninterest income was $6 million for the quarter, increasing 3% from the second quarter.

Mike Daley: I will now like to turn the conference over to Mike Daley, Chief Accounting Officer, and Head of Investor Relations. Please go ahead.

Speaker 3: Primary drivers were growth of treasury and credit card revenue.

The primary drivers were growth of Treasury and credit card revenues. These improvements were partially offset by lower SBA loan sales. After some pent up demand in second quarter as we transitioned back to an originate and sell model.

Mike Maddox: Good morning and welcome to Crossfirst Bank Shares 3rd quarter 2023 Earnings Conference Call. Before we begin please be aware this call will include forward looking statements including statements about our business plans, expansion and growth opportunities, expense control initiatives, sources of liquidity, capital allocation strategies, and our future financial performance. These comments are based on our current expectations and assumptions and our subject to risks and uncertainties that could cause actual results to differ materially from these statements.

Speaker 3: These improvements were partially offset by lower SBA loan sales after some pent-up demand in second quarter as we transitioned back to an originate and sell model.

Speaker 3: Moving to slide 10, excluding the acquisition related severance and court deposit intangible expenses from both Q3 and Q2, non-interest expense decreased 0.9 million compared to the second quarter of 23, due to lower compensation and discretionary expenses.

Moving to slide 10, excluding the acquisition related severance and core deposit intangible expenses from both Q3 and Q2.

Noninterest expense decreased <unk> 9 million compared to the second quarter of twenty-three.

Mike Maddox: Our forward looking statements are as of the date of this call and we do not assume any obligation to update or revise them except as required by law. Statements made on this call should be considered together with the risk factors identified in today's earnings release and our other filings with the SEC. We may also refer to adjusted or non-gap financial measures. A reconciliation of non-gap financial measures to gap financial measures can be found in our earnings release. These non-gap financial measures are not meant to be a substitute for or superior to financial measures prepared and accordance with gap.

Due to lower compensation and discretionary expenses we.

Speaker 3: We advanced our efforts to drive additional efficiencies and gain operating leverage in the quarter. And we will continue our focus on cost control with adjusted efficiency improving 2% to 55% this quarter.

We advanced our efforts to drive additional efficiencies and gain operating leverage in the quarter and we will continue our focus on cost control with adjusted efficiency, improving 2% to 55% this quarter.

Speaker 3: Our head count remained flat in the quarter, despite the Tucson acquisition, and we anticipate it to remain stable for the rest of the...

Our head count remained flat in the quarter. Despite the Tucson acquisition, and we anticipate it to remain stable for the rest of the year.

Speaker 3: Our tax rate was 21% for the quarter. And we expect the tax rate to remain in a range of 20 to 22%.

Our tax rate was 21% for the quarter and we expect the tax rate to remain in a range of 20% to 22%.

Mike Maddox: Our presentation will include prepared remarks from Mike Maddox, President and CEO of Crossverse Bankshares, Randy Rapp, President of Crossverse Bank, and Ben Klaus, CFO of Crossverse Bankshares. At the conclusion of our prepared remarks our operator Anthony will facilitate a Q&A session. At this time I would like to turn the call over to Mike who will begin on slide five of the presentation available on our website and filed with our earnings release.

Speaker 3: Tangible book value per share was 3% lower compared to the prior quarter, due to the unrealized loss unavailable for sale security.

Tangible book value per share was 3% lower compared to the prior quarter due to the unrealized loss on available for sale Securities.

Speaker 3: On a year-to-date basis, excluding the impacts of the unrealized losses, we have grown tangible book value per share by 7%.

On a year to date basis, excluding the impacts of the unrealized losses, we have grown tangible book value per share by 7%.

Speaker 3: as of quarter end where well capitalized under all capital ratio.

As of quarter end were well capitalized under all capital ratios. We continued to advance our goal of building capital. This quarter as we saw moderating asset growth strong earnings and a continued decline in unfunded commitments.

Mike Maddox: Mike, thank you and good morning everyone. I'm very proud of this quarter and the great job that our team is doing. We are seeing the benefits of the investments we have made over the last 24 months. We continue to execute on our strategic plans this quarter with growth and operating revenue, core deposits, and earnings despite a difficult macro environment for banking. We delivered 7% growth in adjusted earnings this quarter with adjusted net income of 18.6 million or 37 cents per share.

Speaker 3: We continued to advance our goal of building capital this quarter as we saw moderating asset growth, strong earnings, and a continued decline in unfunded commitments.

Speaker 3: We are continuing to work toward our goals of 11% total risk-based capital and 10% CET-1 ratios by year end and intend to continue to focus on building capital from here.

We are continuing to work toward our goals of 11% total risk based capital and 10% CET one ratios by year end and intend to continue to focus on building capital from here.

Speaker 3: On slide 11, our liquidity remains strong, consistent with the prior quarter at 34% of assets.

On slide 11, our liquidity remains strong consistent with the prior quarter at 34% of assets, we have significant liquidity of approximately $2 4 billion from on and off balance sheet sources.

Mike Maddox: We remain focused on improving profitability by scaling our franchise and our high growth dynamic markets and verticals, optimizing our expense base and driving efficiency, all while remaining diligent on credit quality. Pressure on our margin has slowed due to some normalization of pricing for deposits. We also continue to benefit from our highly variable loan portfolio. Our focus as a company is on earnings and profitability growth and less so on balance sheet growth as we drive improved efficiency and operating levels, coverage.

Speaker 3: We have significant liquidity of approximately 2.4 billion from on and off-balance sheet sources.

Speaker 3: In addition to our cash on the balance sheet, our 100% AFS investment portfolio includes $332 million that can be pledged to the FHLB, and we have an additional $46 million of securities we could sell today at a net gain.

In addition to our cash on the balance sheet are 100% F. S. Investment portfolio includes 332 million that can be pledged to the F. H L. B and we have an additional 46 million of securities we could sell today at a net gain.

Speaker 3: We also have multiple sources of additional off-balance sheet liquidity, including FHLB, Federal Reserve, Fed Funds, and other wholesale funding sources, totaling approximately 1.5 billion.

We also have multiple sources of additional off balance sheet liquidity.

Including F H L B Federal reserve fed funds and other wholesale funding sources totaling approximately $1 5 billion.

Mike Maddox: Competition for deposits continues to be strong. Despite that, however, our funding composition continues to improve as core deposits increased while wholesale borrowings declined in our loaned deposit ratio improved this past quarter. As expected, our loan portfolio grew modestly this quarter, and we continue to see nice balance in our loan mix. Additionally, I'm pleased to share that our SBA lending platform continues to gain traction across our markets and is accelerating our non-interest income growth.

Speaker 3: We have continued to increase the liquidity in our investment portfolio with an ongoing, moderate shift in the ratio of munis.

We have continued to increase the liquidity in our investment portfolio with an ongoing moderate shift in the ratio of munis.

Speaker 3: We are evaluating all of our options to improve the yields on our earning assets, including potential restructuring scenarios.

We are evaluating all of our options to improve the yields on our earning assets, including potential restructuring scenarios.

Speaker 3: As Mike mentioned, we closed the Tucson acquisition in the quarter, resulting in 4.5 million in core deposit and tangibles, and 5.2 million in day one loan marks. Both consistent with our delay-

As Mike mentioned, we closed the Tucson acquisition in the quarter, resulting in $4 5 million and core deposit intangibles and $5 2 million in day, one loan marks both consistent with our diligence modeling.

Mike Maddox: Credit quality continues to be a primary focus, especially in the face of the number of challenging external factors. Our overall credit quality remains at manageable levels that are well within acceptable norms. Randy will cover credit in more detail in a moment, but let me just say that I remain confident in our high-quality credit standards, our well-diversified portfolio, and more importantly, our relationship-based client approach. During this past quarter, we completed our Tucson acquisition, which complements our existing Arizona franchise and provides additional liquidity and lower cost deposits.

Speaker 3: We are on track for a fourth quarter system integration and full realization of our expected cost save.

We are on track for a fourth quarter system integration and full realization of our expected cost savings.

Speaker 3: This acquisition was immediately creative with very modest delusion and a short earnback of less than two years.

This acquisition was immediately accretive with very modest dilution and a short earn back of less than two years.

Speaker 3: In summary for the quarter, we continue to grow profitability.

In summary for the quarter, we continued to grow profitability.

Speaker 3: help them constant and expand our client deposits in a very competitive environment.

Held NIM constant and expanded our client deposits in a very competitive environment.

Speaker 3: Operator, we are now ready to begin the question and answer portion of the call.

Operator, we are now ready to begin the question and answer portion of the call.

Speaker 2: we will now begin the question and answer session. So as a person, if you start and want your touchtone phone, if using a speaker phone, you stick up your hands up before pressing the keys. To withdraw from the question queue, please press star then two.

We will now begin the question and answers.

Mike Maddox: We were excited to welcome our new shareholders, clients, and team members, and look forward to supporting the needs of the Tucson community. We expect to have our Tucson clients fully onboarded to our systems by mid-November. Waking ahead, we are in a unique position with the opportunity to increase profitability through multiple levels, scaling our existing investments, optimizing expenses, and maintaining a focus on credit quality. We have the opportunity to increase profitability by gaining density in our dynamic high-growth metro markets and verticals.

Well that's attached to them. It is star then one on your Touchtone phone.

On the speakerphone, please pick up your handset before pressing the keys to withdraw from the question queue. Please press Star then two.

As a reminder, we do ask that you limit yourself to one question and one follow up.

At this time, we will pause momentarily to assemble our roster.

Yeah.

Our first question will come from Brady Gailey with K B W.

You May now go ahead.

Hey, Thank you good morning, guys.

Good morning Brady.

Speaker 6: Your net interest margin was 319 in the third quarter.

So your net interest margin was 319 in the third quarter.

Mike Maddox: In addition, we intend to continue to prudently manage expenses, including an ongoing focus on optimizing operations, leveraging key technology, and infrastructure investments. Finally, maintaining solid credit quality is at the center of everything we do. Our team is focused on these priorities, which we believe position cross-first for the future while enhancing our franchise value.

Speaker 6: You know, if you look at four Q, you're saying it's going to be three 20 to three 25. So what are you basically calling a bottom on the margin here with it going up next quarter? And then any thoughts on how you think the margin could trend next year in 24?

If you look at for you, you're saying that's going to be $3 20 to $3 25. So are you basically calling a bottom on the margin here.

They're going up next quarter, and then any thoughts on how you think the margin could trend next year in 'twenty four.

Speaker 3: Good morning, Brady. It's been. We do think we're at the bottom just especially given the stability. We have seen, as I mentioned in my remarks, Q2 had...

Hey, good morning, Brady, it's Ben.

We do think we're at the bottom just especially given the stability we have seen as I mentioned in my remarks, you know Q2 had.

Randy Rapp: And now, I'd like to turn the call over to our president of cross-first bank, Randy Rap. Thanks, Mike. Good morning, everyone.

Speaker 3: a pickup of three or four basis points from accrual changes. Q3 had the headwind of three or four basis points from accrual changes, but we've really seen very good stability in the margin and expect that through your end.

Randy Rapp: In Q3, we continue to intentionally moderate the pace of loan growth. We remain highly focused on deposit generation and closely monitored our portfolio metrics. In Q3, we reported total loan growth of 149 million, resulting in a growth rate of 2.6 percent for the quarter, or 10 percent on an annualized basis. The increase was primary, primarily attributable, to 106 million in loans from the Tucson acquisition, which are largely USDA and SBA guaranteed commercial real estate and CNI credit.

A pickup of three or four basis points from accrual changes Q3 had the headwind of three or four basis points from accrual changes, but we've really seen very good stability in the margin and expect that that through year end.

Speaker 3: You know, we're right in the midst of planning for 2024, but thinking ahead a little bit, I think we continue to expect to see that stability and some expansion as our loan portfolio continues to re-endex.

You know we're right in the midst of planning for 'twenty 'twenty four but thinking ahead, a little bit I think we continue to expect to see that stability and some expansion as our loan portfolio continues to to re index.

Speaker 6: Alright, and then you know we've heard you guys talk about the two capital targets that you'd like to hit at the end of this year which looks like you'll be able to do. You know, will capital continue to build even beyond those two thresholds, the 11% and the 10% I'm just trying to indirectly figure out if the buyback is back on the table. Next year just giving the stock is still well below tangible book value.

Alright.

We've heard you guys talk about the two capital targets that you'd like to hit at the end of this year, which it looks like you'll be able to do.

Randy Rapp: Legacy markets and lines grew approximately 43 million, led by a slight increase in CRE exposure, primarily due to fundings on existing relationships. We continue to focus on increasing loan yields, and the average loan yield on new production in the quarter was a strong 8.54 percent. Average CNI line utilization for the quarter was 47%, which is slightly above the prior quarter, and portfolio churn decreased slightly and is now below the historical average level.

Well capital continue to build even beyond those two thresholds of 11% and a 10% I'm just.

Trying to indirectly to figure out if the buyback is back on the table next year, just given the stock is still well below tangible book value.

Speaker 6: Yeah, Brady. You know, I think those were our year end targets. We expect to hit those. We will continue to build some capital, but you know, I think we will also look to be opportunistic if our stock continues to trade where at that and look at returning some capital share goals. All right, great. Thanks, guys.

Yes Brady.

I think those were our year end targets, we expect to hit those we will continue to build some capital, but you know I think we will also.

Randy Rapp: We expect portfolio churn to decrease slightly over the next several quarters. Our loan portfolio continues to remain balanced with 43% in commercial real estate and 44% in CNI and owner-occupied real estate. Energy exposure is now 214 million or 4% of the total portfolio. On slide six, you can see there remains good diversity within each of these portfolios with the highest CRE property type industrial accounting for 19% of total CRE exposure and the largest industry segment in CNI being manufacturing at 10% of CNI exposure.

Look to be opportunistic if our stock continues to trade where it's at.

And look at returning some capital to shareholders.

Okay, Alright, great. Thanks, guys.

Okay.

Our next question will come from Michael Rose with Raymond James.

Go ahead.

Speaker 7: Hey, good morning guys, thanks for taking my questions. I wanted to go back.

Hey, good morning, guys. Thanks for taking my questions I wanted to go back to the margin.

Speaker 7: margin. Then what was the impact of purchase counting?

And what was the impact of purchase accounting accretion.

Speaker 7: This quarter, I think the total marks ended up being 5.2 million. And just from prior deals, just wanted to get a stand.

This quarter I think the total marks ended up being $5 2 million in just from prior deals just wanted to get a sense for.

Speaker 7: what the remaining a creavably yield or purchase kind of recreation is at the end of the third quarter so I can just You know try it back into what core versus reported NEMIS

What the remaining accretable yield or purchase accounting accretion is at the end of the third.

Randy Rapp: Total office exposure is now 294 million, down slightly from 312 million at the end of Q2 and is 5% of total loans. The average office loan size remains 7 million and the largest is 25 million. The average loan to value is 61% and the majority of the portfolio is suburban class A and class B office. As we have previously stated, we will follow our strongest sponsors to other markets, but the majority of this exposure is in our footprint centered in North Texas, Kansas City and Colorado.

Third quarter, so I can just try.

Try to back into what core versus reported numbers. Thanks.

Speaker 3: Sure, Michael, good morning. A Cretian for particular to Canyon in the quarter.

Sure sure.

Sure Michael Good morning.

Accretion for particular to canyon in the quarter.

Speaker 3: was about $80,000. So not a whole lot of an impact. Total accretion, contemplating last year's deal as well was about 650,000 in the quarter.

It was about $80000, so not not a whole lot of an impact.

Total accretion you know contemplating last year's deal as well was about 650000 in the quarter.

Okay, and then you have the total amount of remaining accretion schedule accretion do you expect to kind of come through over time.

Randy Rapp: Moving to credit highlights on slide seven, for Q3, we reported an increase in non-performing assets to 36.1 million, resulting in a non-performing asset to total asset ratio of 50 basis points. The increase was primarily due to two CNI credits and one CRE credit moving to non-performing. I'm pleased to report that one of the CNI credits with a $13.6 million balance that was over 90 days past due at quarter end has raised fresh equity and plans to bring the credit current this week.

Speaker 7: I'll give you the quarterly numbers. Our go-forward is we expect a creation in the five to 600,000 per quarter range and deposit intangible amortization in the eight to 900,000 range per quarter based on those two deals.

I'll give you the quarterly numbers are you know our go forward is we expect accretion in the five to 600000 per quarter range and deposit and.

Intangible amortization in the eight to 900000 range per quarter based on those two deals.

Yeah.

Okay. That's helpful and then maybe just switching to.

Randy Rapp: This action will lower our NPAs back to 22.5 million or 31 basis points of total assets. The remaining non-performing loans are primarily CNI with one fully secured commercial real estate transaction. This remaining NPA ratio of 31 basis points is in line with the same period in 2022 and our ORE balance remains at zero. Classified assets to capital plus combined reserves ended Q3 at 14%, which is up from 9.6% the end of Q2, but remains at a low level.

Speaker 7: Credit quality. I appreciate all the color on the moves and in MPA.

Credit quality I appreciate all the color on the moves in MPA.

Speaker 7: precise classified things like that.

Criticized classified.

Things like that.

Speaker 7: What's at the end of the day? What's really dry? Are you seeing just general impact of a slowing economy on your costs?

What's what at the end of the day, what's what's really drive. It are you seeing just general impact of a slowing economy on your customers is this indicative.

Speaker 7: You know, indicative of what you expect to see going forward or it's just more of you guys trying to be proactive and identify potential issues, you know, where there's not the high expectation of loss, you're just being conservative and building the reserve here, just trying to...

Indicative of what you expect to see going forward or is this just more of you guys trying to be proactive and identify potential issues, where there is not a high expectation of loss Youre just being conservative in building. The reserve here just trying to get an overall sense for how you guys are kind of thinking about credit as we think about a slowing economy next year. Thanks.

Randy Rapp: The increase in classified assets was due to downgrades of several CNI and CRE credits. 21 million of the increase is well secured by current real estate valuations and 5 million has USDA or SBA guarantees. We do not expect any material loss from these loans and we are proactively managing each relationship. In addition, 5 million of the increase in classifieds was due to acquired loans which were marked to market in the quarter.

Speaker 5: yeah, hey michael is randy, happy to take that you know i think michael in general uh... you are we are starting to see some some slowdown in the economy and that impact some of the borrowers

Yeah, Hey, Michael This is Randy I'm happy to take that you know I think Michael in General you, where we are.

We're starting to see some some slowdown in the economy and that impact some of the borrowers.

Speaker 5: You know, where you've seen our movement here lately is probably more related is more, you know, kind of one off, not systemic to anyone factor.

<unk> seen our movement here lately is probably more related is more kind of one off are not systemic to any one factor U in the CRE book you knew you are starting to see the impact of higher interest rates on some of those portfolios and.

Speaker 5: In the CRE book, you are starting to see the impact of higher interest rates on some of those portfolios.

Randy Rapp: For the quarter, we reported net charge-offs of 1.3 million, resulting in a charge-off rate of 9 basis points on an annualized basis, and 5 basis points on a trailing 12-month basis. At quarter end, we reported an allowance for credit loss to total loan ratio of 1.2 percent, which is up from 1.17 at the end of Q2. The combined allowance for credit loss and reserve for unfunded commitments totaled 1.31. For the quarter, we reported provision expense of 3.3 million, resulting in a provision to charge-off rate of 254 percent.

You know what's interesting is that when you look across sort of your multifamily industrial you're seeing the absorption rates and the rental rates are pretty much as is underwritten them, but you're seeing expenses higher than anticipated and that can be everything from operating cost to insurance costs and then you'll finally to interest is.

Speaker 5: much as underwritten, but you're seeing expenses higher than anticipated. And that can be, you know, everything from operating costs to insurance costs and then, you know, finally, to interest expense. So, you know, that is definitely putting some pressure on the margins on some of the CRE book. But, you know, so in summary, you know, clients being more cautious, but not really seeing any systemic, you know, issues within the portfolio. Michael, I-

And so that is definitely putting some pressure on on the are the margins on some of the CRE book, but you know so in summary.

Speaker 5: clients being more cautious, but not really seeing any systemic issues within the

Clients being more cautious, but not really seeing any systemic.

Issues within the portfolio Michael.

Randy Rapp: Provision was higher than Q2 due to day-1 Cecil reserves for the acquired Tucson loans and changes in credit metrics during the quarter. With a total ACL of 72 million, our current ACL to non-performing loan ratio is nearly 200 percent. We remain highly focused on maintaining good credit metrics moving forward.

Speaker 4: Michael, I would just say, we are trying to be conservative and we are trying to be proactive and...

Michael I would just add we are trying to be conservative and we are trying to be proactive and.

Speaker 4: We're not seeing anything systemic in our portfolio. When I'm talking to customers, especially on the CNI side, it's really interesting.

We're not seeing anything systemic in our portfolio.

When I'm talking to customers, especially on the C&I side, it's really interesting.

Speaker 4: You know, they talk a lot about how demand for their products in a lot of industries is slowing, but they still have tremendous pricing power. So their margins are still fairly high, and that's covering up the slowing and demand. So right now a lot of our customers still are doing pretty well.

They talk a lot about how demand for their products in a lot of industries are slowing.

Randy Rapp: Turning to slide 8, deposit increased 3.8 percent to 6.3 billion, up 232 million from the previous quarter. Non-interest bearing deposits increased during the quarter to 1 billion, and now represents 16 percent, but total deposits, up from 15 percent at the end of the second quarter.

But theyre still have tremendous pricing power. So their margins are still fairly high and that's covering up a slowing in demand so right.

Right now a lot of our customers still are doing pretty well.

Speaker 7: Okay, great. Maybe just tangent, tangentially related to that. You know, we kind of think about slowing long growth.

Okay, Great maybe just.

Yes, essentially related to that as we kind of think about slowing loan growth.

Ben Klaus: Ben will cover additional deposit portfolios, statistics, and his remarks. We continue to focus heavily on deposit generation, expanding fee income with Treasury management and credit card products, improving loan yields in the portfolio with newer originations and as existing facilities mature and monitoring the portfolio for performance issues. We remain confident in our proven sponsors and underwriting standards, which include significant equity contributions, but we could continue to see some negative grade movement in the short term.

Speaker 7: the next couple quarters, it sounds like some of that's obviously costumer driven, some of that's probably credit driven decision making. As we think about next year, I know it's early, but it's

Into the next couple of quarters, it sounds like some of that.

Customer driven some of that is probably you know credit driven decision, making as we think about next year I know, it's early but it's kind of a low to mid single digit growth rate more what youre expecting versus kind of the high single digit growth rate you're expecting this year. Thanks.

Speaker 7: you know, growth rate more, what you're expecting versus kind of the high single digit growth rate. You're expecting the sheer...

Speaker 4: I think that's fair, Michael. You know, we're gonna continue to be prudent and conservative and be fairly selective as it relates to credit. And so, you know, as we look to next year, assuming the economy continues to kind of move in the direction that it is, I think amid single digit numbers, fair. Great.

I think that's fair Michael you know, where we're going to continue to be prudent and conservative in and and be fairly selective as it relates to credit and so.

Ben Klaus: We expect our loan growth rate to continue to be at a moderate level in the last quarter of 2023, but we continue to actively call and client to generate a healthy pipeline of new transactions heading into 2024.

You know as we look to next year.

Assuming the economy continues to kind of move in the direction that it is.

Think of mid single digit number is fair.

Great I appreciate you guys, taking my questions.

Ben Klaus: I will now turn the call over to Ben to cover the financial results in more detail. Ben, thanks Randy and good morning everyone. Gap net income this quarter was 16.9 million or 34 cents per share. The third quarter included acquisition related charges of 1.3 million, and as Randy said a day one Cecil provision of 0.9 million, resulting in adjusted net income of 18.6 million or 37 cents per share. Both Gap and adjusted net income improved from the prior quarter with slowing margin pressure yielding increased net interest income and increase in non-interest income and lower non-interest expenses.

Okay.

Thank you.

Yeah.

Our next question will come from Andrew Liesch with Piper Sandler.

May now go ahead.

Speaker 8: Hey everyone, good morning. Morning, everyone. Just on the, on the expense base, a really good job here controlling cost and something that's got the conversion here from the Canyon deal coming up this quarter. I guess what's the good expense run rate to look at here for the fourth quarter and then going into the early.

Hey, everyone. Good morning.

Morning, Andrew just on the on the expense base really good job here of controlling cost and sounds like you got the conversion here on the Canyon deal coming up this quarter I guess, what's the it's a good expense run rate to look at here for the fourth quarter and then going into the early part of next year.

Speaker 3: Hey, good morning, Andrew. It's been, we left our guidance unchanged, so we believe our expense rate and non-intersex expenses will be 34 to 35 million in Q4. You know, folding in canon will push that toward the upper end of that range, especially if you include the CDI amertization.

Hey, good morning, Andrew It's it's been we left our guidance unchanged. So we believe our expense rate noninterest expenses will be 34 to 35 million in Q4.

Ben Klaus: These gains were partially offset by a higher provision. Quarterly adjusted return on average assets was 1.04 percent and adjusted return on average equity was 11.3 percent. We saw modest balance sheet growth primarily from the acquisition and continued our progress toward driving higher profitability through expense management in the quarter.

You know folding in canyon will push that towards the upper end of that range, especially if you include the CDI amortization.

Speaker 3: You know, in regard to next year, I don't think we see a significant change in the expense base where

In regard to next year I don't think we see a significant change in the expense base where.

Speaker 3: Obviously in the midst of our planning for that right now and we will really be focused on continuing to optimize our footprint as you heard Mike talk about.

Obviously in the midst of our planning for that right now and we will really be focused on continuing to optimize our footprint as you heard Mike talk about.

Ben Klaus: Network. Net interest income on a fully tax equivalent basis expanded slightly by 0.5 million from the second quarter due to the benefit of higher average earning assets, higher loan yields, and one additional day, which were partially offset by higher cost of funds. Average earning assets increased 183 million compared to the prior quarter, with most of that increased from the Tucson acquisition. The yield on loans increased 9 basis points due to repricing, as well as higher yields on new loans, and was negatively impacted 7 basis points due to the net impact of non accrual loans, as we are proactively addressing any signs of weakness in the portfolio.

Speaker 4: You know, Andrew, I continue to believe we have a great operating leverage opportunity as we continue to grow. I mean, we've made a lot of investments over the last 24 months.

Andrew.

I continue to believe we have a great operating leverage opportunity as we continue to grow and we've made a lot of investments over the last 24 months.

Speaker 4: And we can continue to grow the company without a lot more additions to our expense base. And we're in the midst of

And we can continue to grow the company without a lot more additions to our expense base.

We're in the midst of Av.

Speaker 4: looking at contracts that we have and other things to try to drive efficiency. Ben is hiring a procurement person to help us drive efficiency through the organization and we're really committed to keeping our head count levels stable. Just in this environment we have to continue to operate more efficiently and continue to drive our efficiency ratio.

Looking at our contracts that we have and other things to try to drive efficiency.

Ben is hiring a procurement person to help us drive efficiency through the organization and we're really committed to keeping our head count levels are stable. So.

Ben Klaus: Turning to page 9, our total cost of deposits was 3.59% for the quarter, against loan yields of 6.96%. Our total non maturity deposit beta against the entire rate cycle through the third quarter was 57, in line with our expectations, and we have slowed the growth in our cost of funds. Our deposit base remained consistent with the prior quarter in terms of diversification and composition. We were very pleased to see net deposit growth beyond the acquisition impact, as well as growth in non interest bearing deposits, which allowed us to decrease wholesale funding and FHLB borrowing during the quarter.

In this environment, we have to continue to operate more efficiently and continue to drive our efficiency ratio down closer to 50 and get our noninterest expense to average asset ratio down well below two.

Speaker 4: down closer to 50 and get our non-interest expense average asset ratio down well below 2.

Speaker 8: that's helpful. And then on the non-interesting side, recognizing there could be some volatility on the VDNIC fail number. But if I look at the other core items like the service charges,

Got it that's helpful and then on the noninterest income side, recognizing there could be some volatility on the gain on sale number, but if I look at like the other core items like the service charges and.

And interchange.

Speaker 8: I guess how should we looking at the sea income from here? This is 6 billion kind of a high water market.

I guess, how should we be looking at fee income from here, the 6 million kind of a high watermark or anything you could talk a little bit longer but pretty good fee quarter.

Speaker 3: Andrew, we think it clearly will build from there. You know, this quarter had a little bit of moderation in our gain on loan sales to more of a normalized rate. I expect a fairly similar amount of gain on sale in that $500,000 range for Q4. We continue to focus on expanding that as we leverage our SBA platform.

Andrew We think it clearly will build from there this quarter had a little bit of moderation in our gain on loan sales to more of a normalized rate I expect a fairly similar amount of gain on sale in that five to $600000 range for <unk>.

Ben Klaus: Our effective, uninsured deposits percentage, and our deposit concentration across the top 25 clients, remained consistent in this quarter. Fully tax equivalent net interest margin narrowed 8 basis points compared to the prior quarter to 3.19%. Our core NIM, adjusting out noise from accrual impacts, has remained stable in a range of 3.21 to 3.23 since May. Our balance sheet is only slightly sensitive through a potential additional 25 basis point rate move yet this year, and we expect margin to be in a range of 3.20 to 3.25 in Q4.

Our Q4, we continue to focus on expanding that as we leverage our SBA platform across the rest of our markets and I know Randy's team is very very focused on continuing growth in treasury and credit card going into 'twenty four I don't know if you want to add Andrew.

Speaker 8: across the rest of our markets. And I know Randy's team is very, very focused on continuing growth in Treasury and credit card going into 24. And I don't know if you want to add. And I would add to that is that we've made significant investment in our Treasury and credit card platforms in the last 18 months that we really feel like we can scale up as we move forward. And so we think there's good opportunity there. Everyone, this is all really helpful. Thanks much. I'll take that back.

I'd just add to that is you know we've made significant investment in our treasury and credit card platforms and in the last 18 months that we really feel like we can scale up as we move forward and so we think there's good opportunity there.

Ben Klaus: With continued lower anticipated loan growth, we don't expect as great of a need to add higher cost deposits going forward. While we acknowledge the competition for deposits will persist, we believe we are near the peak of deposit pricing, allowing us to continue to defend our NIM as we move forward from here. Non-interest income was $6 million for the quarter, increasing 3% from the second quarter. The primary drivers were growth of treasury and credit card revenues.

Got it everyone. This is all really helpful. Thanks, so much I'll step back.

Thanks, Andrew.

Yeah.

Again, if you have a question. Please press Star then one.

Speaker 2: Hey, great. Thanks.

Our next question will come from Matt Olney with Stephens you May now go ahead.

Hey, great. Thanks, everybody.

Morning, Matt imagining wanted to ask about the securities portfolio and I. Appreciate slide 11 in the deck, just kind of highlighting some of the the updated strategy you guys have undertaken so far this year.

Speaker 8: I want to ask about the securities portfolio and appreciate slide 11 in the deck just kind of highlighting some of the updated strategy you guys have undertaken so far this year.

Ben Klaus: These improvements were partially offset by lower SBA loan sales after some pent-up demand in second quarter as we transitioned back to an originate and sell model. Moving to slide 10, excluding the acquisition related severance and court deposit intangible expenses from both Q3 and Q2, non-interest expense decreased 0.9 million compared to the second quarter of 23 due to lower compensation and discretionary expense.

Speaker 8: Help us appreciate how much more transition do you see or I guess kind of another way. What inning are we in and this?

Just help us appreciate how much more transition do you see or I guess can I ask it another way what inning are we in in this transition and what kind of cash flows do you see in the near term and I guess the second part of that is under a scenario of recognizing some of the unrealized losses in some kind of restructuring help us appreciate.

Speaker 8: transition and what kind of cash flows do you see in the near term? And I guess the second part to that is under a scenario of recognizing some of the unrealized losses and some kind of restructuring, help us appreciate what your tolerance level is for losses that you would recognize.

What what will your tolerance level as for losses that you would you would recognize.

Ben Klaus: Kansas. We advanced our efforts to drive additional efficiencies and gain operating leverage in the quarter, and we will continue our focus on cost control, with adjusted efficiency improving 2% to 55% this quarter. Our head count remained flat in the quarter, despite the Tucson acquisition, and we anticipated to remain stable for the rest of the year. Our tax rate was 21% for the quarter, and we expect the tax rate to remain in a range of 20 to 22%.

Yeah.

Speaker 3: Sure, good morning, Matt. I would start off by saying, you know, we're probably somewhere in the fifth or sixth, ining out of nine, and we continue to expect to work toward adjusting the mix of munis. You know, the environment has changed so significantly with much more emphasis on

Sure Good morning, Matt.

I'll start off by saying, we're probably somewhere in the fifth or sixth.

Yeah hang out of out of nine and we continue to expect to work toward adjusting the mix of munis.

The environment has changed so significantly with much more emphasis on liquor.

Speaker 3: liquidity after the events in March and in our case much more emphasis.

Liquidity after the events in March and in our case much more emphasis.

Speaker 3: on capital and both of those present some challenges with the muni mix that we had previously managed. That portfolio was very, very successful for us in the prior environment. And as you see there on the slide, we're really shifting our focus a little bit.

On capital and both of those.

Ben Klaus: Tangible book value per share was 3% lower compared to the prior quarter, due to the unrealized loss on available for sale securities. On a year-to-date basis, excluding the impacts of the unrealized losses, we have grown tangible book value per share by 7%. As of quarter end, we are well-capitalized under all capital ratios. We continued to advance our goal of building capital this quarter, as we saw moderating asset growth, strong earnings, and a continued decline in unfunded commitments.

Presents some challenges with with the Muni mix that we had previously managed that portfolio was very very successful for us in the prior environment and as you see there on the slide we're really shifting our focus a little bit in.

Speaker 3: In regard to potential restructuring, you know, we're thinking about

In regard to potential restructuring, we're thinking about two guiding principles really one we want to ensure that we are not compromising our capital ratios by taking a significant loss and beyond.

Speaker 3: two guiding principles really. One, we want to ensure that we are not compromising our capital ratios by taking a significant loss.

Speaker 3: and beyond what we think we can sustain and make up with a short earn back, say, in a one to two year range.

Ben Klaus: We are continuing to work toward our goals of 11% total risk-based capital and 10% CET-1 ratios by year end, and intend to continue to focus on building capital from here. On slide 11, our liquidity remains strong, consistent with the prior quarter at 34% of assets. We have significant liquidity of approximately 2.4 billion from on and off balance sheet sources. In addition to our cash on the balance sheet, our 100% AFS investment portfolio includes 332 million that can be pledged to the FHLB, and we have an additional 46 million of securities we could sell today at a net gain.

Beyond what we think we can sustain and makeup with a with a short earn back say in a one to two year range. The other thing that the other guiding principle. We have is we believe we can restructure that portfolio just given the higher risk weight for munis, we can restructure.

Speaker 3: The other thing that the other guiding principle we have is we believe we can restructure that portfolio just given the higher risk weight for munis.

Speaker 3: We can restructure that portfolio in such a way that it's neutral or perhaps even improves our ratio as we will redeploy.

That portfolio in such a way that it's neutral or perhaps even improves our ratio as we will redeploy.

Speaker 3: proceeds from a potential restructuring into something into products with a lower risk rate.

Proceeds from a potential restructuring into something into products with a with a lower risk rate.

Speaker 3: underlying all of that we believe we can continue our trajectory of improving yield there. As I'm sure you can appreciate the interest rate environment particular in the

Underlying all of that we believe we can continue our trajectory of improving yields there as I'm sure. You can appreciate the interest rate environment particular in the five plus year portion of the curve has been very volatile.

Ben Klaus: We also have multiple sources of additional off balance sheet liquidity, including FHLB, Federal Reserve, Fed Funds, and other wholesale funding sources totaling approximately 1.5 billion. We have continued to increase the liquidity in our investment portfolio with an ongoing modern shift in the ratio of munis. We are evaluating all of our options to improve the yields on our earning assets, including potential restructuring scenarios. As Mike mentioned, we closed the Tucson acquisition in the quarter, resulting in 4.5 million in core deposit and tangibles, and 5.2 million in day one loan marks, both consistent with our diligence modeling.

Speaker 3: five plus year portion of the curve has been very volatile, and so we're just going to be prudent about thinking about executing against a restructuring to make sure we do it in the best way we can. But those are kind of the parameters that we're using to think about that.

So we're just going to be prudent about thinking about executing against our restructuring to make sure. We do it in the best way, we can but those are kind of the parameters that we're using to think about that.

Speaker 2: Okay, that's helpful, Ben. And just to clarify that, it sounds like it's all within the mix of the securities portfolio. I didn't hear any commentary about just changing the relative size of it. Is that a fair statement?

Okay. That's helpful and just to clarify that it sounds like it's all within the mix of the securities portfolio I didn't hear any commentary about just changing the relative size of it.

Is that a fair statement.

Speaker 3: That is a fair statement. Yes, we we continue to expect the size as a percentage of our balance sheet to remain consistent.

That is a fair statement, yes, we continue to expect the the size as a percentage of our balance sheet to remain consistent.

Speaker 9: Okay, that's helpful. And then I guess just as a follow up on the deposit side, I think you mentioned the DDA balances, even outside the Tucson deal, showed some modest growth. I guess just looking forward, are you comfortable saying now that this has bottomed and over time we're gonna build from here as far as the DDA balance?

Okay. That's helpful. And then I guess, just as a follow up on the deposit side I think you mentioned the DDA DDA balances even outside the Tucson deal showed some modest growth.

Ben Klaus: We are on track for a fourth quarter system integration and full realization of our expected cost savings. This acquisition was immediately creative with very modest delusion and a short earnback of less than two years. In summary for the quarter, we continued to grow profitability, held NIM constant, and expanded our client deposits in a very competitive environment.

I guess just looking forward are you comfortable saying now that this has this has bottomed and over time, we're gonna.

Build from here as far as the DDA balance.

Speaker 4: That's the goal, Matt. I mean, you know, we're very focused on deposit, core deposit growth, and continuing to change our mix. We want to continue to try and lower our cost of funds and really believe that's important to building franchise value. So I mean, everything from goal setting to incentive plans to you name it is all focused on growing non-interest bearing deposits and core deposits.

So that's the goal Matt I mean, you know, we're very focused on deposit core deposit growth and continuing to change our mix.

Operator: Operator, we are now ready to begin the question-and-answer portion of the call. We will now begin the question-and-answer session, up before pressing the keys. To withdraw from the question cue, please press star then two. As a reminder, we do ask that you lemme yourself to one question and one follow up. At this time, we'll pause momentarily to assemble our roster.

We want to continue to try and lower our cost of funds and and really believe that's important to building franchise value. So.

I mean everything from goal setting to two incentive plans to you name. It is all focused on growing.

Noninterest bearing deposits and core deposits.

Okay. Thanks, guys appreciate your help.

Speaker 10: Thanks, Matt.

Thanks, Matt.

Brady Gailey: Our first question will come from Brady Gailey with KBW. You may now go ahead. Hey, thank you. Good morning, guys. Morning, Brady. So your net interest margin was 319 in the third quarter. If you look at 4Q, you're saying it's going to be 320 to 325.

Speaker 2: This concludes our question and answer session. I would like to turn the comments back over to Mike Maddox for any closing remarks.

This concludes our question and answer session I would like to turn the conference back over to Mike Madden for any closing remarks.

Ben Klaus: So what are you basically calling a bottom on the margin here with it going up next quarter? And then any thoughts on how you think the margin could trend next year and 24? Good morning, Brady. It's been. We do think we're at the bottom just especially given the stability. We have seen, as I mentioned in my remarks, you know, Q2 had a pickup of three or four basis points from accrual changes.

Speaker 4: I just want to thank everybody for joining our call today. Again, I'm really proud of the team and the job they've done and the progress we're making as a company in the third quarter. I think we started to see some of the benefits of the cost-cutting measures that we took earlier this year. And we are very focused on continuing to drive market share in our existing markets.

I just want to thank everybody for joining our call today again.

I'm really proud of the team and the job they've done and the progress we're making as a company.

Third quarter I think we've started to see some of the benefits of the cost cutting measures that we took earlier this year.

And we are very focused on continuing to drive market share in our existing markets.

Speaker 4: and really trying to drive operating leverage, which we think is a big opportunity for us. So we will continue to work hard and thank you all very much again for joining us today.

And really trying to drive operating leverage, which we think is a big opportunity for us. So we will continue to work hard and thank you all very much again for joining us today.

Speaker 2: The conference is now concluded. Thank you for attending today's presentation.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Ben Klaus: Q3 had the headwind of three or four basis points from accrual changes, but we've really seen very good stability in the margin and expect that through your end. You know, we're right in the midst of planning for 2024, but thinking ahead a little bit, I think we continue to expect to see that stability and some expansion as our loan portfolio continues to re-index. Alright, and then you know, we've heard you guys talk about the two capital targets that you'd like to hit at the end of this year, which it looks like you'll be able to do. You know, we'll capital continue to build even beyond those two thresholds of the 11% and the 10%.

Ben Klaus: I'm just I'm trying to indirectly figure out if the buyback is back on the table next year, just giving the stock is still well below tangible book value. Yeah, Brady, you know, I think those were our year end targets. We expect to hit those. We will continue to build some capital, but you know, I think we will also look to be opportunistic if our stock continues to trade where at that and look at returning some capital of shareholders.

Brady Gailey: Alright, great. Thanks, guys.

Michael Rose: Our next question will come from Michael Rose with Raymond James. You may not go ahead. Hey, good morning, guys. Thanks for taking my questions. I wanted to go back to the margin. Then what was the impact of purchase counting accretion? You know, this quarter, I think the total marks ended up being 5.2 million. And just from prior deals, just wanted to get a sense for what the remaining a credibly yield or purchase counting accretion is at the end of the third quarter.

Michael Rose: So I can just, you know, try it back into what core versus reported NIMAS. Thanks. Sure. Sure, Michael. Good morning. Thank you very much, was about $80,000, so not a whole lot of an impact. Total accretion, you know, contemplating last year's deal as well was about $650,000 in the quarter. Okay, and then do you have the total amount of remaining accretion? Schedule accretion, do you expect to kind of come through over time?

Michael Rose: I'll give you the quarterly numbers. You know, our go-forward is we expect accretion in the five to 600,000 per quarter range and deposit and tangible amortization in the eight to 900,000 range per quarter based on those two deals. Okay, that's helpful.

Randy Rapp: And then maybe just switching to credit quality. I appreciate all the color on the moves in MPAs and you know, criticized classified things like that. What's at the end of the day? What's really dry? Are you seeing, you know, just general, you know, impact of a slowing economy, you know, on your customers is this, you know, indicative of what you expect to see going forward or it's just more of you guys trying to be proactive and identify potential issues, you know, where there's not a high explication of loss, you're just being conservative and building the reserve here, just trying to get an overall sense for how you guys are kind of thinking about credit as we think about the slowing economy next year.

Randy Rapp: Thanks. Yeah. Hey, Michael, this Randy. I'm happy to take that. You know, I think Michael in general, you know, we are starting to see some slowdown in the economy and that impact some of the borrowers, you know, where you've seen our movement here lately is probably more related is more, you know, kind of one off, not systemic to any one factor. In the CRE book, you know, you are starting to see the impact of, you know, higher interest rates on some of those portfolios.

Randy Rapp: And you know, what's interesting is that when you look across sort of your multifamily industrial, you're seeing the absorption rates and the rental rates pretty much as underwritten, but you're seeing expenses higher than anticipated. And that can be, you know, everything from operating costs to insurance costs and then, you know, finally to interest expense. So, you know, that is definitely putting some pressure on the margins on some of the CRE book.

Randy Rapp: But, you know, so in summary, you know, clients being more cautious, but not really seeing any systemic, you know, issues within the portfolio. Michael, I would just add, you know, we are trying to be conservative and we are trying to be proactive and we're not seeing anything systemic in our portfolio. When I'm talking to customers, especially on the CNI side, it's really interesting. You know, they talk a lot about how demand for their products in a lot of industries is slowing, but they still have tremendous pricing power. So their margins are still fairly high and that's covering up the slowing and demand. So right now, a lot of our customers still are doing pretty well.

Randy Rapp: Hall. Okay, maybe just tangentially related that is, you know, we kind of think about slowing long growth, you know, into the next couple quarters. It sounds like some of that's, you know, obviously, customer driven, some of that's probably, you know, credit, you know, driven decision making. As we think about next year, I know it's early, but it's kind of a low to mid-single digit, you know, growth rate more, what you're expecting versus kind of the high single digit growth rate you're expecting this year.

Randy Rapp: Thanks. I think that's fair, Michael. You know, we're going to continue to be prudent and conservative and be fairly selective as it relates to credit. And so, you know, as we look to next year, assuming the economy continues to kind of move in the direction that it is, I think a mid-single digit number is fair. Great, I appreciate you guys taking my questions. Thank you.

Andrew Liesch: Our next question will come from Andrew Leish with Piper Sandler. You may not go ahead.

Ben Klaus: Hey everyone, good morning. Good morning, Andrew. This time the, on the expense base, really good job here controlling costs and something that got the conversion here from the Canyon deal coming up this quarter. I guess what's the good expense run rate to look at here for the fourth quarter and then going into the early part of next year? Hey, good morning, Andrew. It's been, we left our guidance unchanged, so we believe our expense rate and non-interest expenses will be 34 to 35 million in Q4.

Ben Klaus: You know, folding in Canyon will push that toward the upper end of that range, especially if you include the the CDI amortization. You know, in regard to next year, I don't think we see a significant change in the expense base. We're obviously in the midst of our planning for that right now and we will really be focused on continuing to optimize our footprint as you heard Mike talk about. You know, Andrew, I continue to believe we have a great operating leverage opportunity as we continue to grow.

Ben Klaus: I mean, we've made a lot of investments over the last 24 months and we can continue to grow the company without a lot more additions to our expense base and we're in the midst of, you know, looking at contracts that we have and other things to try to drive efficiency. Ben is hiring a procurement person to help us drive efficiency through the organization and we're really committed to keeping our head count levels stable. So just in this environment, we have to continue to operate more efficiently and continue to drive our efficiency ratio down closer to 50 and get our non-interest expense average asset ratio down well below two.

Ben Klaus: That's helpful. And then on the non-interest income side, recognizing there could be some volatility on the G9 sale number. But if I look at the other core items like the Service Charger, and Interchange. I guess, how should we look at the sea income from here? This is $6,000,000 kind of a high water market, and you could send a little bit lower, so that was a pretty good feed quarter. Andrew, we think it clearly will build from there.

Ben Klaus: You know, this quarter had a little bit of moderation in our, our gain on loan sales to more of a normalized rate. I expect a fairly similar amount of gain on sale in that $5,000 to $600,000 range for Q4. We continue to focus on expanding that as we leverage our SBA platform across the rest of our markets, and I know Randy's team is very, very focused on continuing growth in Treasury and credit card going into 24.

Ben Klaus: I don't know if you want to add. Andrew, we've made significant investment in our Treasury and credit card platforms in the last 18 months, that we really feel like we can scale up as we move forward, and so we think there's good opportunity there.

Andrew Liesch: Everyone, this is all really helpful. Thanks so much, I'll get back. Thanks, Andrew. Again, if you have a question, please press star then one.

Matthew Olney: Our next question will come from Matt, only with Stevens. You may now go ahead. Hey, great. Thanks more everybody. Lauren, I want to ask about the security portfolio and appreciate slide 11 in the deck just kind of highlighting some of the updated strategy you guys have undertaken so far this year. Just to help us appreciate how much more transition do you see or I guess kind of another way, what any are we in in this transition and what kind of cash flows do you see in the near term.

Matthew Olney: And I guess the second part to that is under a scenario of recognizing some of the unrealized losses and some kind of restructuring, help us appreciate what your tolerance level is for losses that you would recognize. Thanks.

Ben Klaus: Sure, good morning, Matt. I would start off by saying, you know, we're probably somewhere in the fifth or sixth inning out of out of nine and we continue to expect to work toward adjusting the mix of munis. The environment has changed so significantly with much more emphasis on liquidity after the events in March and in our case much more emphasis on capital and both of those present some challenges with with the muni mix that we have previously managed that portfolio was very, very successful for us in the prior environment.

Ben Klaus: And as you see there on the slide, we're really shifting our focus a little bit in regard to potential restructuring, you know, we're thinking about two guiding principles really. One, we want to ensure that we are not compromising our capital ratios by taking a significant loss and, you know, beyond what we think we can sustain and make up with a with a short earn back say in a one to two year range.

Ben Klaus: The other thing that the other guiding principle we have is we believe we can restructure that portfolio just given the higher risk weight for munis. We can restructure that portfolio in such a way that it's neutral or perhaps even improves our ratio as we will redeploy proceeds from a potential restructuring into something into products with a with a lower risk rate. Underlying all of that, we believe we can continue our trajectory of improving yield there as I'm sure you can appreciate the interest rate environment particular in the five plus year portion of the curve has been very volatile.

Ben Klaus: And so we're just going to be prudent about thinking about executing against a restructuring to make sure we do it in the best way we can, but those are kind of the parameters that we're using to think about that. Okay, that's helpful, and just to clarify that, it sounds like it's all within the mix of the security portfolio. I didn't hear any commentary about just changing the relative size of it. Is that a fair statement?

Ben Klaus: That is a fair statement, yes. We continue to expect the size as a percentage of our balance sheet to remain consistent. Okay, that's helpful. And then I guess just to follow up on the deposit side, I think you mentioned the DDA balances even outside the Tucson deal showed some modest growth. I guess just looking forward, are you comfortable saying now that this has bottoms and over time we're going to build from here as far as the DDA balance?

Ben Klaus: That's the goal, Matt. I mean, we're very focused on deposit, court deposit growth and continuing to change our mix. We want to continue to try and lower our cost of funds and really believe that's important to building franchise values. So, I mean, everything from goal setting to incentive plans to you name it is all focused on growing non-interest bearing deposits and court deposits. Okay, thanks guys, be sure you're help. Thanks, Matt.

Operator: This concludes our question and intercession.

Mike Maddox: I would like to turn the comments back over to Mike Maddox for any closing remarks. I just want to thank everybody for joining our call today. Again, I'm really proud of the team and the job they've done and the progress we're making as a company in the third quarter. I think we started to see some of the benefits of the cost cutting measures that we took earlier this year and we are very focused on continuing to drive market share and our existing markets and really trying to drive operating leverage, which we think is a big opportunity for us. So, we will continue to work hard and thank you all very much again for joining us today.

Operator: The conference is now concluded. Thank you for